There's one major reason startups are switching their workers from contractors to employees, and it's not lawsuits

When on-demand cleaning service Homejoy shuttered its doors last month, it pointed the finger at the lawsuits the company faced over its decision to classify workers as independent contractors instead of employees.

However, many of the on-demand companies who have recently re-classified their independent contractors as employees - or who began doing business by only hiring so-called W2 employees - say blaming legal reasons is just a sideshow.

The real reason companies are switching is that it just makes a better business.

"There's a lot of noise around legal," said Joe Du Bey, CEO and co-founder of Eden, an on-demand startup that sends out "wizards" to fix technology.

Eden is the latest startup to make the decision to transition Eden's workers over from contractors to employees. It's been a summer of change as Instacart, Shyp and Luxe all flipped their labor force to employees.

The distinction between worker classifications, once the province of labor and employment attorneys, has become a lightning rod in the booming technology industry. New on-demand services, from ride-hailing company Uber to home-delivery service Instacart, all rely on armies of workers to run errands, park cars and handle other jobs.

A bevvy of recent lawsuits assert that some companies have improperly classified workers in order to keep their costs down. The lawsuits have raised fears that the entire business model that underpins some of today's most richly-valued start-up companies could be at risk.

According to some start-ups though, putting employees on the payroll is not incompatible with providing an on-demand service.

Eden's Du Bey said the company needed to ramp up employee training on the technical and customer service side if it hoped to continue to receive five-star reviews and to garner repeat business. Too much training would violate independent contractor status, so it's a mutually beneficial arrangement to switch. Eden ends up paying its "wizards" $30 an hour.

"A lot of companies look for the easy way out," Du Bey said. "To be a company that has the potential to wow someone, there is no other way."

Full-time can mean flexible

The difference between the 1099 workers and W-2 employees, according to the IRS, is that for common-law employees, employers "must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid." The same is not necessarily true for an independent contractor.

In addition, benefits are often extended to employees but not independent contractors, and employers have the right to control how a worker behaves - how to dress, for example, or specific customer interaction protocol - when they're an employee and not an independent contractor.

Luxe Valet originally had its workers as W-2 employees, but switched early on to independent contractors or "1099s" as they are referred to in the industry because of the flexibility it offered the workers. Switching back to W2 won't necessarily curtail the freedom of its valets, but it will give Luxe the sizable boost in control that it craved as a business and the end result changes the consumers experience.

"We knew that we could have better services if we could tell them what to do and to give them more training," said Curtis Lee, co-founder and CEO of Luxe Valet.

So far, the company hasn't had a single valet leave during the transition, Lee said.

Now, Luxe has the ability to assign valets to certain areas to ensure coverage throughout the city like in Noe Valley and Glen Park. Otherwise, they would all go to San Francisco hot spots like SOMA and the Financial District.

Munchery, an on-demand meal delivery service, opted for W2 employees because of the level of personalization it can add to the business as well.

Drivers get to know repeat customers and the locations they live, so they know to drop food off at the back door or the easiest place to park on the block, said its CEO and co-founder Tri Tran in an interview with Business Insider in June.

The cost versus benefit

Switching to W2 employees can mean a significant increase in costs.

Munchery says that hiring its drivers as employees adds an estimated 20%-30% to cost per hour.

"However, the aggregate increase in labor cost is lower because classifying team members as employees improves retention and enables us to train them, increasing their efficiency," Munchery's VP of operations, Kris Fredrickson told Business Insider in July. "The primary additional costs a company that issues W-2s must bear are payroll taxes, workers' compensation premiums, and employee benefits for qualifying employees."

Lee said that Luxe's costs to switch are lower though because its valets don't need cars or have to be reimbursed for mileage - the customer is the one that's providing that. Luxe instead supplies the jackets and phones its valets need, but not the ubiquitous blue Razor scooter that's also become associated with the brand, Lee said.

Despite the increased costs, Lee is hopeful that the costs of mistakes will go down and customer satisfaction in a consistent experience will go up to balance the effects of the switch.

The company make a conscious decision to place people in certain locations rather than having to react to where its valets were before.

"Now we can push them," Lee said. "Whereas pull was the model before."